From the July 2007 issue of Boomer Market Advisor • Subscribe!

Aggregation technology paints panoramic financial picture

How often do today's clients park all of their assets at one investment firm? Not often. Alternative investments, abandoned 401(k)'s and online trading accounts are just a few examples of the modern investment portfolio. Broker/dealers and advisors often have limited access to information about these investments, yet they can account for a large portion of the portfolio. This poses a problem. Aggregation technology can help.

Small firms can obtain the information they need through in-depth interviews with clients. Larger firms face a more daunting task: gathering, validating and compiling data for thousands of investors. The situation is especially challenging for fast-growing broker/dealers that each year recruit scores of advisors and accompanying clients.

Efficiently collecting far-flung registration information for their accounts can overwhelm the broker/dealer's transition team.

Broker/dealers usually develop technology solutions in-house, but many firms also address this issue through third-party, professional data aggregators. Data aggregators' sole purpose is to accurately gather and report investment data. Why do broker/dealers choose to outsource this key component of their business?

Comprehensive aggregation is harder than you may think -- The financial industry is a technologically advanced segment of our economy, but lack of standardization has made it difficult to consolidate data from disparate sources. Part of the problem is that information for many of these assets does not exist in electronic form. When it does exist, online information often sits inside a "walled garden" -- a database that isn't available to industry partners -- or encoded within one of many competing, proprietary file formats.

Aggregators must develop interpreter software, use less-than-ideal gathering methods like "screen scraping," or in extreme cases manually enter account information from printed statements.

Data collecting is only the beginning of the process. Advisors and broker/dealers require a high degree of accuracy for report generation, with some even writing accuracy guarantees into their contracts. To deliver quality, aggregators perform double checks to catch errors. Some validate asset prices against multiple pricing sources. Others utilize checksum algorithms or staff review loops.

Data sharing is making a difference. Server-to-server communication protocols like SOAP and file formats based on open standards like XBRL have made data sharing cheaper and easier. Broker/dealers and advisors will benefit from minimized processing delays and decreased service costs.

Broker/dealers rely on aggregated data to meet their compliance needs -- Efforts previously focused on supervision of brokerage transactions and commissions that flowed through the home office, but determining client suitability requires a complete picture of client assets. Aggregation tools can enable a compliance department to see more of those assets (even those that aren't housed at the firm), accurately assess suitability, and simplify the generation of trade blotters and sales reports. Complex tasks like verifying breakpoints for a household across custodians can be streamlined, helping broker/dealers respond more quickly to NASD audit requests.

Do advisors and clients really care about consolidated reporting? -- The answer is, increasingly, "yes." The aggregation push that began with banks in the late 1990s was largely ignored by mass-market consumers. But interest is growing, with almost 90 percent of advisors reporting that their clients want consolidated reports. Much of this upswing is due to baby boomers, who wish to organize their assets as retirement approaches.

The biggest fans of consolidation technology will be advisors who use the improved client picture to design all-encompassing plans and offer more targeted advice.

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